Global Inequality (part 3)

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This final post on Branko Milanovic’s Global Inequality will focus on the future prospects he sees for reducing economic inequality in the world. He discusses three kinds of inequality: inequality among countries, inequality within poorer countries, and inequality within richer countries, especially the United States.

Inequality among countries

Milanovic expects the median incomes of countries to continue to converge as the economies of poorer countries continue to grow faster than those of richer countries. However, he expects this convergence to be limited in several ways. Currently “it is only Asian countries that have been catching up with the rich world.” Progress has been much slower in other parts of the world, especially Africa. And although growth in China accounts for a lot of the global convergence in incomes, this may not always be the case. In a few years, China may be so far above average that further development there may increase global inequality rather than reduce it. Then continued convergence will depend on what other countries do.

Although the narrowing gap between rich and poor countries is encouraging, it is occurring so slowly that “one cannot expect global inequality to be reduced by more than one-fifteenth of its current level” over the next twenty years.

Inequality within poorer countries

Milanovic suggests that countries like China are passing through a phase of the first Kuznets wave that more developed countries experienced at least a century ago. They are experiencing a familiar pattern in which industrialization initially increases opportunities for the few, and only later for the many, as discussed in the previous post. Although the data are somewhat sketchy, Milanovic sees signs that economic inequality has peaked in China and is beginning to subside. Mass education and a reduced supply of cheap, unskilled labor would be among the reasons for the transition.

On the other hand, many poor countries are still in an even earlier phase of the transition, in which inequality is increasing because the benefits of economic development have yet to be experienced by large portions of their populations.

Inequality within richer countries

I found Milanovic’s views on this topic a bit confusing. On the one hand, he maintains that information technology and globalization have initiated a new Kuznets wave of economic change, in which inequality is rising again but will ultimately fall. To make that case, he needs reasons for the fall as well as the rise. Otherwise, he cannot distinguish his theory from more pessimistic assessments like Piketty’s Capital in the Twenty-first Century, which sees rising inequality as a fundamental feature of capitalism. However, when Milanovic tries to identify mechanisms by which inequality might fall, he expresses little confidence that they will work any time soon.

Milanovic identifies five “benign forces” that could theoretically reduce inequality:

  1. Political changes could result in higher and more progressive taxation. However, the global mobility of capital makes it easier for the wealthy to escape taxation. In addition, many citizens of modest means have trouble supporting higher taxes, even when that might be in their own best interest.
  2. The widening wage gap between more and less educated workers could be narrowed by improvements in the quantity and quality of education. However, Milanovic has trouble imagining that average years of education could rise above thirteen. He also thinks that improvements in the quality of education “face natural limits, given by the aptitude and interest of students to excel in whatever they choose to do.” Some would object that if better education were more widely available, more students would rise to the occasion.
  3. As the technological revolution proceeds, innovations that originally profited the few can be more widely adopted. On the other hand, the ownership of capital has become more concentrated lately, so the control of profitable innovations remains largely in the hands of a few.
  4. As wages rise in poorer countries, workers in richer countries should face less competition from foreign low-wage labor. However, it could be a long time before poor countries outside of China and a few other Asian countries experience much wage growth.
  5. Technological progress could raise the productivity of low-skill workers specifically. But this would go against the historical experience of capitalism, in which technological change normally boosts the income of the more skilled over the less skilled.

I found the last point especially troublesome, since it seems to me to undercut one of the strongest reasons for a Kuznets curve in the first place. Surely the mass-production technologies of the twentieth century helped bring many blue-collar workers into the middle class by boosting their productivity, raising their wages, and making former luxuries like automobiles more affordable. If we are looking for mechanisms for reducing inequality in the new wave of change, shouldn’t we be looking for a new productivity revolution along the lines suggested by Rifkin’s The Zero Marginal Cost Society or Paul Mason’s Postcapitalism? Milanovic  doesn’t anticipate anything that radical, but maybe the falling inequality phase of the alleged Kuznets curve won’t work without some fairly dramatic change. Ironically, Milanovic begins his chapter on future inequality by criticizing previous attempts at prediction for assuming too much continuity from the present to the future.

The United States: A “perfect storm of rising inequality”?

Milanovic is especially pessimistic about reducing inequality in the United States. He provides five reasons he expects the rise in inequality to continue:

  1. The share of national income going to capital rather than labor will remain high, especially since businesses find it economical to replace labor with machinery.
  2. The income from capital will remain highly concentrated.
  3. The people with the highest incomes will also be the ones who can save and invest the most, so the same people will be getting most of the benefits from both labor income and capital income.
  4. These labor-rich and capital-rich individuals will also tend to marry each other, so that wealth and income are even more concentrated for households than they are for individuals.
  5. The rich will use their political power to support policies that protect their economic interests at the expense of those of the middle class and the poor.

Milanovic concludes:

It is hard to see where any forces might come from that could counter rising income inequality in the United States….Forces promoting offsetting policies such as more widespread education, a higher minimum wage, and more generous welfare benefits seem weak compared with the almost elemental forces that favor greater inequality.

By this time, the reader who has followed the argument from the beginning may be wondering what happened to the original idea of the Kuznets curve, with its rise and fall of inequality. Well, “the second Kuznets curve will have to repeat the behavior of the first if inequality is to decline again. But it is doubtful whether this second decline will be accomplished by the same mechanisms as those that reduced inequality in the twentieth century….” What mechanisms Milanovic does suggest are mostly political, especially changes in tax policies and improvements in public education, changes that seem unlikely in the light of his previous remarks. The reliance on political rather than economic mechanisms sounds more like Piketty than Kuznets.

To summarize, Milanovic starts with a Kuznets theory emphasizing economic reasons why inequality first rises and then falls. He does broaden it by suggesting that extreme inequality generates malign forces like violent conflicts that can destroy the wealth of some and create opportunity for others. Yet he ends with a pessimism that economic forces will reduce inequality either benignly or malignly. This leaves it an open question whether what we are living through is a second Kuznets wave at all. If it isn’t, then the first Kuznets curve was a unique historical event from which we cannot generalize, and the book’s theoretical framework falls apart.

In general, I found the book’s data very informative and its interpretations thought provoking. But in the end I found its theoretical position on the central question of falling inequality too ambiguous to be convincing.

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